Balancing Budgets and Cabinet appointments

Judith February & Anthea Gardner

Judith February & Anthea Gardner

Judith February is based at the Institute for Security Studies (ISS). Prior to that she was executive director of the HSRC’s Democracy and Governance unit and also head of the Idasa’s South African Governance programme for 12 years.

Anthea Gardner is founder and managing partner of asset management business Cartesian Capital, where she manages listed equity and fixed income portfolios.

21 Feb 2017 (South Africa)

Nobody would want to be in Finance Minister Pravin Gordhan’s shoes on Wednesday, having to deliver a Budget in a highly stressed environment, while all eyes are on President Jacob Zuma and whether he will ship disgraced former Eskom CEO into the finance ministry – and if so, in what role?

It was another “weekend special”. Well, almost.

As the week wound down after the post-SONA debates and President Jacob Zuma’s unremarkable reply, we heard that Brian Molefe would be sworn in as a Member of Parliament. The news certainly squared with the months of speculation regarding a Cabinet reshuffle and Molefe possibly being parachuted in as the next Finance Minister.

Zuma, never one to show his hand, laughed through recent questions from reporters about a Cabinet reshuffle. Who knows what is to come? When Zuma fired Nhlanhla Nene as Finance Minister in December 2015 and replaced him with the relatively unknown Des/Dave van Rooyen, it was an obvious and capricious act. The outcry was loud and even Zuma realised he had overplayed his hand. We all know what happened next.

Since then Zuma has undermined Pravin Gordhan at every turn, even going as far as saying Van Rooyen was the most capable Finance Minister South Africa ever had, albeit with a historically short tenure.

But this is Zuma’s world. In this world of smoke and mirrors, Zuma is surrounded by friends and associates who through rapacious acts seek to capture the state. The State of Capture report tells us some of the story of how Zuma’s friends like the Guptas aim to get their hands on lucrative contracts, influence government and Cabinet appointments and wield influence over the president.

All around are acolytes who muddy the debates, distract and disrupt. Mzwanele Manyi and the intervention of the Progressive Professionals Forum on, inter alia, the FICA Amendment Bill is a case in point. The complex debates on transformation have thus been reduced either to 140 characters on Twitter, or to self-interest. In most cases too, the Constitution has become a scapegoat for government’s own ineffectiveness or corruption. The toxicity of such “debates” fills the corridors of power and the vacuum left by the president’s lack of leadership.

When Cyril Ramaphosa and Pravin Gordhan led the delegation to Davos earlier this year, one could almost hear Zuma seething. He has become entirely unpredictable yet is also constrained by his waning power, divisions within the ANC and an economy straining under the weight of policy paralysis and a contracting global environment.

His strategic room to move might be limited but Zuma will no doubt try to push those limits. This time he might be less obvious than replacing Gordhan with Molefe. Might Molefe find himself heading up Public Enterprises or some such? Whichever way the axe falls in a possible reshuffle, it is clear that Molefe himself is unfit to be an MP having resigned from Eskom after the so-called “Saxonwold shebeen” shenanigans. He admitted then that he was stepping down from Eskom because that would be in the interests of good corporate governance. Should Molefe be headed to Cabinet it would, to say the very least, be inappropriate, and would raise questions about his several communications with the Guptas and how that has ethically compromised him.

So, amid all this destabilising speculation, Gordhan heads to Parliament on Wednesday to deliver his 2017 Budget Speech. While it is clear that he does not enjoy the confidence of his boss, the show must and will go on. Apart from the political skulduggery, the economic situation we find ourselves in leaves little room for manoeuvre.

South Africa managed to stave off recent downgrades but the economy remains weak with low growth predicted. While the South African Reserve Bank is forecasting 2017 GDP growth of 1.1%, the IMF is less optimistic, pencilling in 0.8%. It thus follows logically that if the economy does not grow, neither will tax revenues. With such low growth, expansive plans will be difficult. Gordhan’s message will be that we need to keep our heads down, spend less and lose less through corruption and inefficiency. In other words – the usual mantra.

In his February 2016 Budget speech Gordhan announced that the hole in his budget would amount to R30-billion over the following two years. By the time the Medium Term Budget Policy Statement (MTBPS) rolled around in October, the size of the hole had increased by 43% to a R43-billion requirement over two years. What appears to be a trend of continually lowering forecast economic growth expectations for the country has left the finance minister with an even bigger problem than in October.

With these figures front of mind, we surely cannot expect to see any meaningful increases in government spending (think social grants, fees must fall, infrastructure maintenance)? While Zuma and the ANC loosely bandy about terms like “radical economic transformation” in an effort to appease the voter base, there has been little thought given to practical implementation of “radical policies” and also what they might mean given economic constraints? The stark reality is that Gordhan’s primary focus must be to generate more revenue to fund the shortfall while containing costs.

And so the questions must be: how can he do so and how will he do so?

The temptation for Gordhan must surely be towards the most simplistic and effective way of generating income, by raising VAT, but this is politically unpalatable – and would the ANC risk alienating its constituency in such a way? After all, the poor would be most affected. It is estimated that raising VAT by 1% would generate an additional R20-billion and would go a long way to help fill the hole in the country’s balance sheet. There are other methods of generating additional revenue such as a higher fuel levy, more sin taxes (we can take that as a given), higher personal marginal tax rates or increases in estate duties, as well as increasing corporate tax. Raising VAT would be another burden on the poor in an environment of already high inequality. The latter is thus a political calculation the Minister will have to make- and not without risk. Last year’s #feesmustfall protests should not be so easily forgotten.

Government has already alluded to a National Health Insurance as justification for a VAT increase, and although we cannot rule it out, Budget 2017 feels less about balancing South Africa’s fiscal position than it does about balancing the political playbook.

While pondering the increase in taxes, the finance minister will also need to cut expenditure, in particular wasteful expenditure. Given his boss’ and some of his Cabinet colleagues’ penchant for waste and corruption, this will be a tough ask. Here Gordhan will be looking towards containing municipal spending by reducing transfers to provinces in addition to tightening the belt at national level. In the MTBPS, Gordhan emphasised the servicing of debt as the fastest growing portion of the government budget, accounting for 3.4% of GDP.

Prying eyes will be watching for an update on state-owned enterprises and in particular SAA after last week’s South Gauteng High Court judgment against the airline to the tune of R1.1-billion, an amount the airline can ill afford after posting a R1.4-billion loss in the last financial year. And while Eskom managed a R4.6-billion profit in their last financial year, this number pales in comparison to the R1-trillion Gordhan will have to find if we are to go ahead with the proposed nuclear power build. It is seemingly unobtainable, but will Gordhan have the power to say no to this deal so shrouded in secrecy and seemingly driven by the president himself?

Adding to the finance minister’s woes last October was the extraordinary R1.18-billion wasteful expenditure account. How does Gordhan rein in his colleagues, their ministries and specifically Zuma himself? Just a cursory look at legal fees paid on Zuma’s watch shows a government that spends far too much money on litigation. Of course, much of this is to defend the indefensible as Zuma and his ministers often seek to avoid transparency and accountability through litigation.

In 2016, national government paid R873-million for legal services, a great deal of which – R300-million – was spent by the SAPS, according to a recent Financial Mail report. There has only been an upward trajectory with an increase to R873-million in 2015/2016. That is an increase of 161% – or about R540-million – since the beginning of President Jacob Zuma’s administration. It’s these sorts of “details” that will be tough for Gordhan to negotiate given the profligacy that is now so widespread in government.

And while the minister is focused on cutting costs and raising income, all of this is being done under the watchful eye of the ratings agencies. South Africa has until now managed to stave off a credit rating downgrade, but come June, the ratings agencies will be forced to make a call; either to remove South Africa from “negative watch” or take the plunge and downgrade our sovereign debt to sub-investment grade.

So Gordhan will have to keep his eye on the ball and do his proverbial balancing act, though one cannot help but sense it is becoming harder to do. In November last year and more recently deputy finance minister Mcebisi Jonas called for a “new social and economic consensus” which had at its core inclusive economic growth and for a “critical mass” of society to mobilise the country out of its “low growth, high inequality trajectory”. This is indeed so, and sufficient consensus across all sectors of society would provide greater space for true transformation of the economy and help us to eschew the shallow speak which so often accompanies economic debates.

But, ours is a brittle, divided society lurching from crisis to crisis with a president who fuels virtually each one.

No one envies Gordhan tomorrow. DM

Judith February is a governance specialist, columnist and lawyer based at the Institute for Security Studies (ISS). She was previously executive director of the HSRC’s Democracy and Governance unit and also head of the Idasa’s South African Governance programme for nine years.

Anthea Gardner is founder and managing partner of asset management business Cartesian Capital, where she manages listed equity and fixed income portfolios.

Judith February & Anthea Gardner

Judith February & Anthea Gardner

Judith February is based at the Institute for Security Studies (ISS). Prior to that she was executive director of the HSRC’s Democracy and Governance unit and also head of the Idasa’s South African Governance programme for 12 years.

Anthea Gardner is founder and managing partner of asset management business Cartesian Capital, where she manages listed equity and fixed income portfolios.

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Judith February is based at the Institute for Security Studies (ISS). Prior to that she was executive director of the HSRC’s Democracy and Governance unit and also head of the Idasa’s South African Governance programme for 12 years.

Anthea Gardner is founder and managing partner of asset management business Cartesian Capital, where she manages listed equity and fixed income portfolios.

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